Target Retirement Balance

How much do you need to have saved in order to retire comfortably and be sure you won’t outlive your savings? For someone thinking about retirement, this is likely the most important question that needs to be answered. But where do you start? Who knows what you’ll be doing 10 years into retirement, let alone 20 or 30 years?

The good news is, we have a simple formula to help you find the answer.

If you’re like most people, your spending in retirement will largely be determined by your spending while you’re still working. A good rule of thumb is to assume that you’ll need about 80% of your pre-retirement gross income to maintain the same lifestyle. This is because some of your work and pre-retirement expenses will fall. For one, you will likely pay less in taxes after you retire. Additionally, you won’t have to worry about commuting, dry cleaning, and the wear and tear on your car. Not to mention, you won’t be saving for retirement.

Now, because this is only a rule of thumb, your situation may be different. Maybe you have aspirations to travel the world, or to buy a vacation home. In those cases, your expenses in retirement could very well go up. On the other hand, you could have more modest visions of retirement. Either way, 80% is a good place to start, you can always adjust from there.

So how much do you need to have saved to be able to produce 80% of your pre-retirement income each year and not risk running out of money? If you’re like most people, you will have some income coming from social security which will help. You can see your estimated social security benefit by visiting the social security administration website here.

Social Security will cover a portion of your retirement income needs, but your savings will have to cover the rest. Your savings should be large enough so that in your first year of retirement, you withdraw no more than 4% of your savings. Each year, you increase your withdrawal amount to account for inflation. While your annual withdrawals will grow significantly over time, the returns on your investments will make up the difference.

HERE’S AN EXAMPLE:

Pre-Retirement Income

$80,000

Apply 80%

$64,000

Less Social Security

$30,000

Income Needed from Savings

$34,000

Apply 4%

$34,000 / 4%

Target Retirement Balance

$850,000

For some people, $850,000 might sound like an impossible sum of money. Keep in mind that Albert Einstein once referred to compound interest “as the eighth wonder of the world.” Our retirement calculator will estimate your probability of reaching your Target Retirement Balance.